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Central bank weighs in on impact of oil price crash

Some observers will be looking for indications Wednesday that Bank of Canada Governor Stephen Poloz might leave the door open for an interest-rate reduction later this year if economic conditions deteriorate.
CANADIAN PRESS FILE PHOTO

OTTAWA — The Bank of Canada will try Wednesday to get a handle on the upheaval set in motion by the unexpected dive in world oil prices.

Canadians should get a better idea how this forecasters’ nightmare will impact the economy, job prospects and the pre-election political landscape when the central bank releases the latest quarterly outlook.

It’s the central bank’s first attempt to provide a detailed economic reading for Canada since the cost of a barrel of oil slid unexpectedly into the $50 (U.S.) range.

At the same time, Bank governor Stephen Poloz will release the latest decision on the trend-setting overnight interest rate. But he is not expected to raise or lower the current rate of 1 per cent.

In recent months, forecasts for the economy have gone out the window in the wake of the huge shift in the energy picture, which has seen the price of oil drop by 55 per cent since June.

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Plummeting oil prices create a range of cross-currents in the economy. Consumers get a hefty break at the gas pump and manufacturing provinces like Ontario should benefit from the double whammy of cheaper factory operating costs and further declines in the value of the Canadian dollar, which makes Canada’s exports more competitive in other countries. The loonie closed Tuesday at 82.60 cents (U.S.) on exchange markets, down 1.10 cents from Monday’s close. But the oil price crash also damages economic prospects for Alberta and other petroleum-producing provinces.

While Poloz has not produced a full forecast so far, the central bank’s preliminary conclusion was that, overall, the impact in Canada of the price crunch will be negative.

“Lower oil prices are likely, on the whole, to be bad for Canada,” Bank of Canada deputy governor Timothy Lane said last week.

He said the positive impacts of lower petroleum prices will be outweighed by the negative effects of reduced income and investment in Canada’s oil sector.

As recently as October, the central bank predicted economic growth in 2015 of 2.4 per cent. But that forecast is expected to be lowered Wednesday in light of the oil price factor.

“The oil price shock has been a bit of game-changer,” said TD Bank senior economist Randall Bartlett. “We are expecting employment growth to slow, output growth to slow and inflation to be weaker” than expected even last month, he said.

Canadian borrowers will be watching to see if Poloz reveals any hints as to whether the central bank will move anytime soon to push up interest rates in a bid to keep the economy from overheating.

Some analysts had been expecting the Bank of Canada to begin driving up borrowing costs late this year, but that’s now up in the air as the economy looks to be stalling. In fact, some observers will be looking for indications that Poloz might leave the door open for an interest-rate reduction later this year if economic conditions deteriorate.

Poloz’s assessment of current trends may also provide insight into how national political events will unfold as Prime Minister Stephen Harper’s government and the opposition gear up for an election expected in October.

Harper has based his economic policies on eliminating Ottawa’s budget deficit in 2015. Last year’s budget predicted the Conservatives would turn around their fiscal picture and run a $6.4 billion surplus in 2015.

But this past fall, Harper made announcements of new spending and family tax cuts that will reduce Ottawa’s bottom line by $5 billion this year. With the oil price likely to reduce Ottawa’s revenues by another $5 billion, Finance Minister Joe Oliver is in danger of sliding back into a budget deficit even after tapping his $3-billion rainy day fund, economists say.

Oliver maintains the government will balance its books in 2015. But last week he unexpectedly announced that because of “market instability” he was postponing the release of Ottawa’s 2015 economic blueprint. Instead of the usual February-March time frame, the budget will not be presented until April at the earliest.

The Bank of Canada’s outlook will provide a hint of how much damage the Canadian economy is facing in the months ahead and how issues such as unemployment and household debt will figure in the election campaign later this year.

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